Kenya Oil, Hot and Getting Hotter

Kenya has become the hottest oil and gas venue in East Africa since big discoveries were made in the country’s virgin oilfields last April. All eyes are on Kenya in 2013 to see how quickly–and economically they can develop those discoveries into production.

Nairobi based Taipan Resources Inc (CVE:TPN) is the 4th largest acreage owner in Kenya, and is getting ready to carry out seismic on Block 2B. They recently attracted Maxwell Birley as CEO. Mr. Birley has been instrumental in discovering more than 2 billion barrels of oil equivalent in his 30-year career—much of it in Africa and Asia.

• Why Kenya is the hottest venue in East Africa
• Why 2013 will be a stellar year for Kenya
• Why the regulatory environment remains attractive
• Why Kenya outranks its neighbours
• Why infrastructure will be in place in time for commercial activity
• Why this venue is good for the juniors
• Why the Somalia security risk remains low
• What Taipan is really chasing

James Stafford: There were some major discoveries in Kenya last year. Could you give me some colour on these discoveries that has the market thinking Kenya is now one of the hottest exploration spots on earth?

Maxwell Birley: There are a couple—or 2 billion–reasons actually. First, two recent discoveries by Tullow in the Tertiary Lokichar basin of Kenya are in similar geological settings as the discoveries also made by Tullow in the Albertine Basin in Uganda, just to the west.

Uganda has over 2 billion barrels, and the discoveries are similar enough that one could assume the eventual size of the resources in the Lokichar basin could be in the billions of barrels range as well.

There are also other Tertiary basins in Kenya that are attractive. Based on geochemical work we recently did it’s possible that the eventual hydrocarbon resource size for the whole of Kenya could be much higher than this.

Being specific the unrisked prospective resources for Taipan’s acreage in Kenya is 530 million barrels. We also believe that this estimate will likely increase to approximately 1.0 billion on completion of our studies.

These estimates are for only 2 blocks in Kenya, if this is reasonably extrapolated to other blocks across the country one can easily forecast very significant hydrocarbon resource sizes indeed.

James Stafford: What’s the easiest and most challenging thing about working with the Kenyan government and in the Kenyan political climate?

Maxwell Birley: The Ministry of Energy is always ready for a meeting. They listen to our concerns and take the appropriate action. They quickly follow up and give us the support that we need with other Ministries. In the field the local administration is also very helpful. We have regular meetings to make sure our work continues without a hitch.

With regard to the political climate, there is an election coming up in March 2013. We’re making arrangements so that we do not have a slowdown in seismic operations during that period. The last elections in 2007 were associated with some “geographically limited” security issues, however these were located far from our areas of operation, so we are not expecting the elections to have much impact on our operations.

James Stafford: The Kenyan government is reviewing its oil and gas regulations. Among the suggested amendments is one that would see the National Oil Corporation (NOC) get a 25% interest in oil properties that foreign firms are operating in Kenya, but this would put the government in a precarious position vis-à-vis attracting investors. How do you see this playing out in the end?

Maxwell Birley: The government is reviewing the terms that shall apply for licences/contracts that will be granted in the future. Oil companies will review all the terms on offer at the time of bid submission and compare them to the attractiveness of the acreage.

James Stafford: In November last year, Kenya expelled Norwegian Statoil, after revoking its exploration license. Is Nairobi increasingly ‘policing’ exploration, and what will this mean for investors in the near/medium term?

Maxwell Birley: One of the main functions of the Ministry is to regulate the companies undertaking exploration activities in Kenya. We feel confident, as in many other countries where we have worked, that if you carry out your commitments in the timeframe of the PSC then your license is 100% secure. If we decide to go into the next phases of exploration on Block 2B we can continue to explore for hydrocarbons on the block for another 4.5 years without concerns to the validity of our contract.

James Stafford: How does the industry view the financial terms offered by Nairobi in oil and gas?

Maxwell Birley: We believe the terms are reasonably attractive, at least for an oil discovery. The reason that only a few exploration wells were drilled in the past was due to the lack of exploration success—and this was driven by the lack of understanding by the oil companies of the basins. It wasn’t because of financial terms offered by the government.

Now that a discovery has been made and our knowledge is increasing, we are going to see a significant increase in drilling activity and therefore reserve additions to the country.

James Stafford: Is Kenya becoming more a game for the majors rather than the juniors, and do you think we will see more joint ventures in the near future?

Maxwell Birley: In our opinion there is a place for small companies at every stage of the development of an oil province. But it’s definitely good news for those juniors with large land positions already in the country. The early movers–i.e. the companies like Taipan that acquired their acreage before the oil was discovered—will benefit from the recent oil discoveries. Most of the more prospective acreage has now been leased and therefore the competition for land is increasing.

As large volumes of oil are discovered, the large independent and Majors will start to notice the country more and more. The Majors—due to their size and complexity—tend to be exploration risk averse and prefer to concentrate on large, lower-risk developments.

James Stafford: How would you like to see Nairobi interact with the energy sector moving forward? And how does Kenya compare with other venues in the region like Ethiopia, Tanzania, and Sudan?

Maxwell Birley: There is no doubt that Nairobi is a premium location for business, tourism and families. This is illustrated by the fact that many multi-nationals operating in the sub-Sarahan African region have their head offices in Nairobi. Regarding interaction, it is the oil industry that will need to develop an active and well respected industry body so that broad industry issues can be discussed at the higher levels.

James Stafford: Kenya is clearly the East African leader in oil infrastructure, and is now starting the Lamu Port-South Sudan-Ethiopia Transit corridor (LAPSSET) project. But it